India's Budget: What It Means for Investors

By

Ben Levisohn

March 1, 2013 3:41 p.m. ET

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India announced its much-anticipated budget yesterday--and the market has taken it badly. India's Sensex stock index has dropped 1.2% since the release of the budget yesterday, while its rupee dropped 2.4%. Is it really that bad?

Mahesh Kumar/Associated Press

HSBC's Leif Eskesen calls the budget "sensible, but not sensational"--but not what investors had been hoping for. He writes:

The Minister of Finance today presented the budget for FY 2014, which was pragmatic and more realistic than last year's budget. However, it was not rich on reforms to spur growth and address the current account deficit, which was negative for the currency...

In the coming days, the market will look to see what the rating agencies might say after the budget announcement. If rating agencies were to again start hinting towards a possible rating downgrade (which our credit strategists are not expecting) then this could trigger another round of INR weakness.

Goldman Sachs' Tushar Poddar agreed that the budget was not what investors had hoped:

The Indian Union budget for the fiscal year ending March 2014 (FY 2014) underscores the government's intent to carry on with structural reforms, i.e., reduce fiscal deficit and increase investments. At the same time, it is also an attempt to appease the voters. Underneath the headline numbers, there are a few ambitious assumptions. Yet, especially as a pre-election budget, it strikes a fair balance overall.

Her biggest concerns? That the government won't raise the money it needs from selling state assets to close its fiscal-spending gap, as well as a bigger tax on corporate earnings and its potential impact on investments.

Goldman's Poddar also worried about the corporate tax. He writes:

We think the increase in the corporate tax surcharge for large companies will have a negative impact on the equity market. Our sector analysts think that the budget will be positive for agriculture (due to interest rate subsidies and higher credit availability for the sector), infrastructure (due to allowing more tax free bonds), financials (due to tax breaks on housing loans) and negative for consumer goods (increase in excise duties for cigarettes) and autos (increase in excise duties for SUVs).

Shares of ICICI Bank (IBN) have dropped 1.7% during the past two days to $41.88, while Tata Motors (TTM) has dipped 2.8% to $26.73. The Wisdom Tree India Earnings (EPI) exchange-traded fund has plunged 4.1%, while the iShares MSCI India Index ETF (INDA) has dropped 4.2%.

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